Feeling the Heat

El Niño could make 2024 the world’s hottest year

The hot weather is proving a challenge and we all seem to be feeling the heat!

A news headline from last week ‘Britain fires up coal plant as solar panels suffer in hot weather’ has more to do with a spike in demand, due to air conditioning units, but the message is clear – we are overheating. Sounds almost as crazy as the headline ‘too windy for wind turbines’ last winter!

However, despite the unpredictability of solar and wind power we still need to push on with investment in renewable energy. Some long-range weather forecasters are suggesting that 2024 could be the world’s hottest year and it will help push the world past a key 1.5°C warming milestone.

Rising temperatures and the incidence of extreme weather is due in part to El Niño or the El Niño Southern Oscillation (ENSO) as it is formerly known by meteorologists. ENSO has three phases – hot, cold, and neutral. The natural phenomenon is the most powerful fluctuation in the climate system anywhere on Earth. The hot phase occurs every two to seven years and sees warm waters come to the surface of South America and spread across the ocean pushing significant amounts of heat up into the atmosphere. The UK Met Office believes that ENSO is starting to ramp up in the Pacific Ocean and ‘will peak at the end of the year in terms of its intensity.’

Previous El Niño’s have led to drier weather conditions in Australia and parts of Asia as well as a weaker monsoon in India. Southern states in America have then had wetter weather in the following winter. The strong El Nino in 1997-98 cost an estimated $5trillion with massive flood and storm damage.

El Niño is not good news for many of the world’s farmers and in turn, central bankers given already high grocery prices and as food inflation has proven to be ‘sticky.’ Mind you, it sounds as if the current UK hot, sticky spell of weather could be a foretaste of things to come in 2024.

Meanwhile, many UK businesses and households are starting to feel the heat as interest rates head higher. The cost of government borrowing has also increased. PM Rishi Sunak and Chancellor Jeremy Hunt must also be sweating along with Bank of England governor Andrew Bailey, as inflation is not falling fast enough.

 

What have we been watching?

 

An important week for interest rates with the US Federal Reserve (Fed) pausing interest rate hikes and a surprise interest rate trim in China. The European Central Bank delivered the expected 0.25% rate hike. Meanwhile, strong wage growth raised the likelihood of further rate hikes by the Bank of England. The mega tech companies continued to drive US indices up with Apple hitting a new all-time high. The top seven US stocks now account for more than half of the rally in the US market over the last three months. Japanese equities also continued their run hitting a new -thirty-three year high helped by heavyweights such as Softbank and Toyota.

US Secretary of State Antony Blinken met with his Chinese counterpart Qin Gang with a view to re-initiating dialogue between the super-powers. Meanwhile, media reports suggest AstraZeneca is exploring a domestic listing of its China business to ease political risk. 

As Ukraine’s offensive appears to be gathering momentum there was a warning from Russian Security Council deputy head Dmitry Medvedev. He accused Western nations of ‘complicity in undermining the Nord Stream pipeline and that Russia has no reason to refrain from destroying the enemy’s cable communications on the ocean floor.’ A veiled threat for the UK’s internet and infrastructure?

 

 

In the UK, wage growth excluding bonuses hit a new high of 7.2%, suggesting further action from the Bank of England with Governor Andrew Bailey highlighting a ‘very tight labour market.’. The two-year gilt yield climbed above 4.9% which is higher than that reached during the disastrous Truss/Kwarteng tenure. The UK is now paying a premium to Italy which has the highest cost of borrowing for two-year money in the EU. The latest expectations following this data suggest peak UK interest rates of 5.8% by early 2024. Not surprisingly, mortgage providers have continued to withdraw or re-price mortgage offers with a two-year fixed rate deal now at 6% and a five -year fixed at over 5.6%. The higher interest rate outlook also saw Sterling move above $1.28. Could higher interest costs, on top of the cost-of-living crisis, be a further nail in the coffin for the Conservatives besides Boris-partygate?

 

The European Central Bank (ECB) increased interest rates by 0.25% to 3.5% as expected. The ECB raised its inflation expectations very slightly while trimming its economic growth outlook. Inflation is now expected to be 5.4% in 2023 before dropping to 3% in 2024. Economic growth was lowered to 0.9% in 2023 and 1.5% in 2024. The ECB used its press conference to inform the market that it was not thinking about pausing and that it was very likely to increase rates in July.

 

In the US, inflation is decelerating as expected with May CPI down to 4%, helped by lower gasoline prices. Core inflation is proving a bit stickier and was unchanged on the previous month at 5.3% due to shelter and used car prices. The Federal Reserve (Fed), as expected, kept its federal funds target rate on hold at 5%-5.25%. The Fed tried to hammer home the message that this is not the end of the tightening cycle, rather a pause, as illustrated by the move to a higher ‘dot plot’ of likely interest rate movements.  Most of the Fed committee now see at least two further 0.25% rate hikes this year to 5.5%-5.75%. The Fed said it was pausing to be ‘prudent’ while assessing the full impact of the recent US banking crisis. However, there was a degree of mixed messaging from the Fed press conference which may imply a divided Fed committee, suggesting communication may remain difficult as the US approaches the end of the tightening cycle.

 

The Peoples’ Bank of China (PBoC) announced a surprise 0.1% cut to its seven-day reverse repo rate to 1.9% suggesting officials are becoming increasingly concerned about faltering economic growth. Markets continue to expect further stimulus measures from the Chinese authorities to support the domestic economy and property sector. 

Read our latest investment insights from Alpha PM

 

Soft economic data continued to overshadow Brent oil at $76.

Finally, flight turbulence has increased as climate change has warmed the planet. Researchers found that severe turbulence increased by 55% between 1979 and 2020 on a typically busy North Atlantic route. Turbulence costs the US aviation industry over $150m a year due to wear- and -tear on the aircraft while more fuel is used as pilots seek to avoid it. Mind you, more turbulence is good news for those businesses involved in aircraft maintenance.

Read Last Week’s Alpha Bites – Chess in the South China Sea

 

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